The Senate's New Student Loan Plan: Give Aid To Students, Not Corporations

By consumeristcareyJuly 28, 2007

Hey kids, good news! Student loans will become cheaper under a bill approved last week by the Senate. H.R. 2669, passed 78-17, will recast the Department of Education as Robin Hood, diverting money from lending companies to students.

The Senate bill will:

Cut subsidies to lenders by $18 billion;

Boost direct aid to students by $17.4 billion;

Raise the maximum Pell grant allowance to $5,400;

Cap loan repayments at 15% of the borrower’s discretionary income (read: beer fund);

Automatically forgive loans after twenty years.

From the Washington Post:

Lending companies said the legislation was a backdoor effort to drive some companies out of business and force borrowers to use a federal program, strongly supported by Democrats, in which the government lends directly to students.

Yes, lending companies, the bill might undercut your business model of obscene interest rates and draconian collection practices. We think this is a great bill that deserves to be enacted into law, but before that can happen, the House and Senate need to meet in a conference committee to hammer out the few remaining details.

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The Stafford loans are guaranteed against default by the government. Yet, the rates charged are over 7%.

People who play by the rules and pay it back are the ones getting screwed and the lenders make a ton of money in interest without a shred of risk because the government covers the tab if the student doesn’t pay it back.

Remember that the loan companies lose money if the interest rate is less than the rate of inflation (~4%). I know my wife’s recent Stafford loan had an APR with an interest rate of ~6% which seemed fair. The extra two percent covers profit and administration costs. I’ve also found with the Stafford loans that you can get fantastic consolidation deals, and that after 3 years of consecutive on-time payments they drop you interest rate by a full point!

The problem that I have is with personal loans with variable APRs. I got a small personal student loan from CitiBank to cover my last ‘super senior’ semester. The rate started at 5% and steadily climbed .25% each quarter until it now sits at 9%! Fortunately it’s small and I can pay it back quickly, but if for people who rely on this sort of loan to pay the bulk of schooling, the loan companies make it almost impossible to stay ahead of the compounding interest.

Ahh… CitiBank. Yes, they and Chase were horrible about putting me on the interest rate treadmill.

Customer: “Look at my new card! Low interest rate! High balance! Charge away!”Customer: [customer charges away, customer is now pretty much locked into a relationship with the credit company that he can’t quickly pay off] Card Company: We’re raising your interest rate just a little.Card Company: We’re raising your interest rate just a little.Card Company: We’re raising your interest rate just a little.Card Company: We’re raising your interest rate just a little.Card Company: We’re raising your interest rate just a little.Card Company: We’re raising your interest rate just a little.Customer: “Say, I just noticed. You’ve been raising my interest rate, haven’t you? “Card Company: Yeah. But we know that you can’t easily get rid of the balance, so what are you gonna do?Card Company: We’re raising your interest rate just a little.Card Company: We’re raising your interest rate just a little.Card Company: We’re raising your interest rate just a little. Customer: “Oh crap. Now I’m even more trapped than before because I really have no way of paying this off.”Card Company: We’re raising your interest rate just a little. […]

“Lending companies said the legislation was a backdoor effort to drive some companies out of business and force borrowers to use a federal program, strongly supported by Democrats, in which the government lends directly to students.”

So…the lending companies know that most of America views this as a good thing, right?

consumerist should do a story on those astrive personal loans. my ex-girlfriend got her parents to co-sign on one of those with her and astrive approved them for up to 20,000 which they would give her in a check within 3 days from applying, but the interest rate beginning after she graduated was variable at 12%!!! So she definitely changed her mind but i’m sure many others aren’t so lucky and end up spending three times what they borrowed to pay it off…. anyone else?

We have been struggling with how our teenager is going to pay for college. This would be a massive positive change. He has been so disgusted with the trap that the current system would put him in that he was almost ready to dump the idea of college.

The forgiveness of 20 years is a big deal. Not for people with plenty of money who “just don’t want to pay their loans”. I think that fictional person is just another version of the welfare mother driving a cadillac wearing a fur coat. There are people that end up in unchangable situations and simply can’t pay back their loans in full. These are situations of becoming disabled, having a disabled child at home they have to care for themselves etc. There is currently no loan forgiveness or even suspension of loan payback in these situations.

When they are adding charges of 2/3 of the face value of a defaulted loan onto them in additional fees there is no getting out from under it. I have talked to a number of people who ended up with these situations.

I am skeptical of all this — surely there is SOME financially-vested special interest that has to profit from this. At what point does Rush start crying out about giving “welfare subsidies” to students?

@Melov: The Dept. of Ed. can get away with calling you a dependant to avoid parents who really can pay for their child’s tuition from doing the same. For 100K, I’m sure there are plenty of people that are willing to take a slight hit on taxes for a few years.

That said, many schools will work with students in these circumstances to find other grants and loans to fill in the gaps. Talk to your financial aid officer.

Wait, WHAT? And will that be retroactive for the rest of us? Because dude, I’m letting these things ride forever if that’s the case!

@Melov: “Fafsa says that I’m a dependent and can’t file as an independent because I’m not 25 years old and it’s the board of educations rules.”

FAFSA’s rules for dependents aren’t the same as the IRS’s, and the intent is to ensure student loans go to students whose families can’t afford tuition. (I think it’s a little dumb, since an awful lot of kids get launched into financial independence when they start college and the MAJORITY who go on to graduate school pay themselves, but I understand the intent.)

Some schools disregard FAFSA’s definitions for graduate students (Duke did) and process all grad students as financially independent, regardless of FAFSA’s thoughts on the matter. Others use the FAFSA system but offer “bridge” financing for those who are financially independent but FAFSA defines as dependent still.

I actually work in the student loan industry, so I have a slightly different perspective than most of you. The bill that has been proposed is overkill. Federal student loans have several options to avoid repayment, including:
– 3 years of unemployment deferment (can be used if underemployed as well)
– 3 years of economic hardship deferment (based on government standards)
– most lenders have at least 2 years of forbearance that can really be used for any reason
– 3 years of economic hardship forbearance (in addition to the deferment).

If you add that up you can see that it is possible for a student to not pay anything for 11 years. If the loan is forgiven after 9 more years, there is hardly any incentive to give these loans.

Plus, if something does happen, it is possilbe to get the loan forgiven. Permanent disability forgiveness does exist, despite what another commenter said. This is in addition to other forgiveness programs run by many lenders for teachers, nurses, etc.

This bill will probably have the negative effect of pushing lenders to push for more private loans, which are no where near as forgiving of bad situations.

To be completely honest, there is no good reason to default on your federal loans.

@Melov: I wonder when that happened. When I found out I could do that I was passed as independent after one year of living on my own and proving I wasn’t receiving money from my family. Of course that was some ten years ago.

@jbohanon: Tuition goes up every year at almost every college (probably every one) and much of the time it’s well above inflation. Purdue raised tuition for this fall and next year over the summer by 6% and it was the lowest percentage hike in the last 5-10 years.

and Jbohanon, WHY would they increase tuition rates because of increased loan amounts, when they increase tuition rates anyways? It is not like the increased loan amounts cost colleges anything. There are probably going to be a few colleges to take advantage of the increased loan amounts, but it isn’t going to be an across the board thing.

If your college increases tuition just enough to remove the immediate benefits from this bill, you should think about going to another college.

btw colleges are increasing tutions because more people are going to college, its classic supply and demand tatics, it has nothing to do with loans, as long as schools get their money thats all they care about.

“If you add that up you can see that it is possible for a student to not pay anything for 11 years. If the loan is forgiven after 9 more years, there is hardly any incentive to give these loans”

well if you look at student loans now…in my experiance at a high price school with a student body of mostly upper middle to upper class students, every year more and more students are just paying cash and not even taking out loans (parents have been saving up since the kid was in dipers or are as rich as hell). this loan program is designed for the people who do not have the luxery of being able to put money aside, and (I am speculating) not being able to afford the option of taking a high intrest private loan. I think loan providors will have to take atvantage of this program considering making some money is better then making no money at all

I think it is absolutely crazy that I can file my taxes on my own, yet am classified as a a dependent on my FAFSA. Yeah, my parents are very well off and are helping me out, but I am still going to be $80,000 in debt when I come out of law school. It is outrageous that the government just assumes after you make a certain amount of money that your children are lighting cigars with $100 bills and therefore shouldn’t qualify for subsidized federal student loans. My mother came out of retirement to help me pay for my law school…that obviously is very kind of her but shouldn’t be necessary. It isn’t like us “rich” people aren’t making sacrifices too. These are the programs that we have been paying for, why shouldn’t we qualify?

However, even though I agree with this legislation, why are we allowing the outstanding charges to disappear after 20 years? Where is the sense in that?

@Melov: and @Eyebrows McGee:
FAFSA isn’t an organization, it’s an application. The entity you’ve got a beef with is the U.S. Department of Education. 1040 is to IRS as FAFSA is to US DoE.
This bill will be an interesting one to watch. Anyone up for a CSPAN party?

Yet again, we continue to throw rocks at the lenders (who, at times, certainly deserve it) and choose to look the other way while the schools who raise their tuition at a rate much greater than inflation get off scot-free. In this same vein of thinking, Big Oil gets a free pass because the evil credit card companies make it so easy to charge $75 fill-ups. Why isn’t anyone investigating colleges, universities, trade schools, etc, for the astronomical cost of education?

I can say without a doubt the government (DOE) loans are MUCH superior to other lenders… Sallie Mae and the other ‘lenders’ (read loan sharks) have lobbied and owned the market for far too long. I had a small loan from Sallie Mae when I started at community college and was paying out of pocket for school. When I went to VCU and changed to Direct Loans the fun began. They put me in collections almost every other semester and claimed I had ‘seperated from school’ over and over. This resulted in them popping me for UNSUB status on my loans and charging me late fees and interest. This went on with them until September of 2006 where the loan had DOUBLED in balance and I paid it off. I tried to work with the ‘customer service’ person and she told me “only the full balance we do not negotiate or remove fees pay it or else the only options you have is pay or we will ruin you” That was a DIRECT quote from a Sallie Mae operator. I could NOT contact them through the entire month of september and the end of August as they gave me a payoff amount and transferred me. Then every night from 5pm to 9pm the call stayed in a hold que. I finally just tried any social in the phone and got through and was told my account is in collections now and that I had 15 days to pay or else.

Funny I have been current with my Direct Loans Account and have NEVER had a problem with them. They have worked with me every time and when I was close to the end of deferment status the lady put a year forbearance in so I didnt have to stress over the loan while working towards a job that paid enough to make payments. They also worked a payment rate that made me current when my salary was too low.

I can only imagine my experience if I had owed serious money to Sallie Mae.